CMC Reports Solid First Quarter
12/27/2007 - Commercial Metals reports net earnings of $69.2 million on net sales of $2.1 billion for the quarter ended November 30, 2007.
Commercial Metals Co. reported net earnings of $69.2 million on net sales of $2.1 billion for the quarter ended November 30, 2007.
First Quarter Results—Net earnings of $69.2 million ($0.57 per diluted share) compare with net earnings of $85.4 million ($0.71 per diluted share) in the first quarter of the prior year. Net sales of $2.1 billion compares with net sales of $1.9 billion in last year’s record first quarter.
CMC attributes the largest swing in earnings—at its International Mills—to lower profitability at its Polish mill and start-up costs in Croatia. These items caused operating profit to fall from $25.9 million in last year's first quarter to a slight loss this quarter.
Current results included a pre-tax LIFO income of $4.3 million ($0.02 per diluted share) compared with a LIFO expense of $10.1 million ($0.05 per diluted share) in the prior-year quarter. The effective tax rate was 34.0%, lower than the first quarter of last year due to state income taxes, but higher than the fourth quarter of last year as earnings from the company’s European mills were lower.
Selling, general and administrative expenses included $10.3 million of costs associated with the investment in the global deployment of SAP software. The amount in the prior year's first quarter was $751 thousand. Other costs ($16.7 million) were capitalized during the quarter. To date, CMC has expensed $45.3 million and capitalized $50.2 million for the project.
Management Comments—“Fabrication and Distribution operations in both our domestic and international groups achieved results exceeding their performance of the prior year's first quarter,” said CMC President and CEO Murray R. McClean. “The Domestic Fabrication and Distribution segment came out from the margin squeeze of earlier quarters; however, its steel import business declined significantly. The International Fabrication and Distribution segment saw continued strong performance in raw materials and inter-Asian trade.
“The Domestic Mills segment, though slightly behind last year's quarter, compared favorably with its fourth quarter, a strong performance given seasonal factors,” continued McClean. “Absent the ongoing residential slump's effect on our copper tube business, we have not yet seen any dramatic impact from the ongoing credit fallout. With relatively steady ferrous scrap prices and high, but volatile, nonferrous pricing, the Recycling segment had results lower than last year. Our International Mills segment was significantly behind last year. CMCZ (Poland) was at the latter stages of a country-wide inventory reduction and CMCS (Croatia) had expected start up and investment costs.”
Segment Analysis: Domestic Mills—The adjusted operating profit for the company’s Domestic Mills segment leveled out at $69.2 million, a 4% decrease compared to last year’s first quarter, although net sales were up by 19% for the same period. Steel mills accounted for $65.9 million of the total, with 20% higher sales compared to the year-ago quarter. Metal margins declined $10 per ton (3%) to $339 as the price of ferrous scrap consumed rose 18%.
The company’s average selling price was $585/ton, a $28/ton increase, while the average selling price for finished goods was up $44/ton to $615/ton. Margins were impacted by the rise in ferrous scrap; a 91% increase in alloys; and a 21% increase in electrodes. Sales volumes at 594 thousand tons reflect a 13% increase, with rebar shipments up strongly and merchants consistent with the prior year.
According to McClean, job activity returned to more-normal levels after the wet summer and a pause caused by the credit crisis. Service centers continued ordering on the basis of declining stocks. On a quarter-to-quarter basis, tonnage melted for the first quarter was up 6% to 566 thousand tons, while tonnage rolled was 487 thousand tons, 8% lower than last year. The price premium of merchant bar over reinforcing bar was $102, up $26 from last year. “We have invested $32.1 million of the expected $155 million total cost of our micro mill project in Arizona," said McClean.
McClean noted that the segment’s copper tube mill recorded an adjusted operating profit of $3.3 million, 4% lower than last year, on a 15% increase in sales. “As residential housing remains weak, we continue to emphasize HVAC products,” said McClean.
Segment Analysis: International Mills—"The combined operations of CMCZ (Poland) and CMCS
(Croatia) were disappointing,” continued McClean, “with a slight adjusted operating loss of 577 thousand as compared to last year's record $25.9 million. This quarter hopefully saw the bottoming of long product pricing for CMCZ (Poland). With continuing GDP growth rates of 6%, the economy attracted more than sufficient steel imports, which are working their way through the distribution channels. The zloty remains strong, having gained against the Euro and the dollar during the quarter and compelled us to change our normal 60/40 split between domestic and export tonnage to closer to 80/20.
“Pricing had a downward trend during the quarter for all product lines, but merchants held up relatively better than rebar or wire rod,” continued McClean. “We shipped 70% more merchant bars this first quarter than the first quarter of last year. With merchants’ slower rolling speeds, we opted to emphasize margins over volume. For the first quarter, tons melted were 294 thousand (18% below last year's 358 thousand); rolled tons equaled 242 thousand against 296 thousand last year; and shipments totaled 268 thousand tons (including billets) vs. 312 last year.
Average selling prices for the segment declined 3% to PLN 1,489 (including 12% billets) from PLN 1,529 per ton (including 22% billets). The decline in selling prices was exacerbated by a 4% increase in the cost of purchased scrap entering production, which resulted in a fall in average metal margin to PLN 623 from PLN 713. The company’s mega-shredder processed 101 thousand tons of scrap during the quarter, representing 34% of the mill's scrap requirements.
"This was our first quarter of operations at CMCS (Croatia), acquired September 19, 2007,” continued McClean. “We inherited a strong workforce and a promising product line, but the mill had suffered such severe liquidity constraints over the last years that it can only be viewed as a turnaround. Our operating loss—representing both operating and startup activities—amounted to $4.5 million. We produced 4900 tons and sold 8900 tons during the quarter. The mill has a functional annual capacity of 330,000 tons."
Outlook—"Our second quarter (winter quarter) is likely to be our slowest quarter for fiscal 2008,” continued McClean. “In the U.S., our recycling business should benefit from higher ferrous scrap prices although flows are typically lower at this time of year. The nonferrous scrap business should be steady with respect to shipments with prices remaining volatile. Our steel mills in the U.S. should benefit from both higher shipments and higher selling prices—although rapidly increasing ferrous scrap prices may cause a temporary margin squeeze. Our copper tube mill may be impacted by a period of destocking after Wolverine's announced plant closures. However, this situation should be short lived.
"Our fabrication and distribution businesses in the U.S. are likely to have mixed results. While backlogs remain very good, fab shipments are likely to slow (seasonal factors), and there may be a subsequent margin squeeze due to rising steel prices. Our steel import distribution business should further decline."
"Internationally, we forecast improving market conditions in Poland as steel prices increase and the destocking period ends," McClean added. "However, the very strong Polish zloty should continue to limit export opportunities. In Croatia, we anticipate a gradual improvement with an operating loss of $2 to $3 million. Our raw materials business should remain strong. Our steel distribution businesses in Asia, Europe and
Australia should also be good.
"We anticipate global infrastructure and nonresidential construction growth rates to remain strong. U.S. nonresidential construction activity should remain similar to 2007. Rising iron ore and ferrous scrap prices should result in significant steel price increases. In global markets, pricing should be mainly demand driven whereas in the U.S., supply driven due to low levels of both steel inventory and steel imports. As well, high bulk freight rates and a weak U.S. dollar are likely to continue to be barriers to U.S. steel imports. We believe higher international steel prices are likely to be sustainable due to China's recent significant reduction in steel exports which should continue throughout 2008."
Commercial Metals Co. and subsidiaries manufacture, recycle and market steel and metal products, related materials, and services through a network including steel minimills, steel fabrication and processing plants, construction-related product warehouses, a copper tube mill, metal recycling facilities and marketing and distribution offices in the United States and in strategic international markets.
